Williamsburg, Perfect for the Holidays

Dallas at Its Best

How Much Is Safe to Spend?

October 20, 2016

The question raised in the headline nags at me. Should you save enough to live to 100?

The subhead promises that “here are ways to insulate yourself against outliving your money”—everyone’s fear—but the recommendations are almost opposite those I received from my husband’s professional advisors after I became a widow in 2009. Instead, the writer seems to say, “Oh, chances are you won’t live that long so don’t worry about it.” But I do worry. We all worry. Or we should.

Women of my generation who find ourselves suddenly single by death or divorce are often ill-equipped to assume management of finances and investments. How much is enough? And how old do you need to be before you touch principal?

We all know stories of women who carried it to the extreme, such as the frugal widows who lived modestly, even on the edge of poverty, and died leaving a large nest egg to their church or another charity.

We moved Lev’s 90-year-old widowed, childless aunt to an assisted-living facility in Corpus Christi after one too many falls in Austin. She was furious, as well as horrified, by the cost. She protested that she and her husband had always saved, living on interest for 25 years. It was a violation of her principles to dip into principal now. Lev told her, “Virginia, this is what you were saving for!” The math was easy. There was more than enough to pay her expenses for the next 10 years. When she died about four years later, several charities received nice bequests.

On the other hand, no one wants to find herself in another aging relative’s shoes. She blithely traveled the world while her son/trustee managed her affairs, until one day he said, “Mother, there is no more money.” When her health failed, she could not afford home health care. Her family took turns spending the night at her home because she could not be alone.

How Do We Find the Proper Balance?

First off, we don’t try to do it on our own. Many of my peers surrender responsibility to their children. Sometimes their husbands’ wills specify that someone else will serve as executor and trustee. I was fortunate that Lev had a team of professional advisors—accountant, banker and attorney—who were familiar with his assets and who assisted me as I struggled to learn his business.

At age 68 I was not going to start spending principal, and I was shocked to learn how much money it takes to produce enough income to live on. I disagree with the numbers cited in the article posted by Next Avenue:

“Some retirement saving is essential. Obviously. But saving for a retirement that ends at age 100 means you’ll need a nest egg that’s about 40 percent larger than what you’d need for a normal life expectancy.

“If a 35-year-old wanted to replace 60 percent of her current $60,000 salary at age 65, she would need about $1.2 million at retirement age if she expects to live to 85. Stretch that to 100, and she’ll need about $1.7 million. (These figures assume 3 percent average annual inflation and a 7 percent return on investments. Your mileage may vary.)”

And later in the same article:

“Uncertainty about longevity is just one of many unknowns in financial planning, says Bob Veres, a financial planning industry consultant and publisher of the trade publication Inside Information.

“So-called “safe” withdrawal rates of 4 percent annually may actually be too conservative in most markets, Veres notes. Also, people often spend less as they age, which makes planners’ typical assumptions that spending will increase with inflation each year too conservative.”

I Disagree

Since the Great Recession of 2008, we have lived in an era of low interest, low inflation, low growth and lower annual rate of return on investments. Making money in this environment is challenging. I am no investment manager, but my understanding is that the annual rate of return minus the rate of inflation tells us what we can safely withdraw while protecting ourselves against future inflation. Some experts question whether even the “safe” withdrawal rate of 4 percent is wise in the current environment. At that rate, we need $1 million in order to withdraw $40,000 a year.

Most of us will not reduce spending by 40 percent in retirement. We do not want to lower our standard of living. We may spend differently—downsizing our home while dining out and traveling more—but we keep on spending. Our grandchildren grow up, marry and have children. We have more family than ever to buy for. Many expenses increase, especially as we approach advanced old age and if we live alone. We need more paid help to do the things we once did for ourselves. We are in the patch-and-fix generation, and we are taking lots of expensive pills.

True, as our medical needs become greater, we tend to travel and go out less. The great unknown is the future. How many 100-year-olds—or even 90-year-olds—do you know who are fully independent? Those who are widowed usually are forced to make the move sooner. The lucky ones move to luxurious, costly independent living communities. Assisted living and skilled nursing facilities tend to be less luxurious and more expensive. Round-the-clock care at home is prohibitive for all but the very wealthy.

If we haven’t saved for that day, what are the options? Will our children dip into their retirement fund or their children’s education fund to pay for our care? Will we have to live with them? Will we be consigned to some dreary facility that serves the indigent? Will we live frugally at home long after it is safe for us to do so?

I am not a gambler. I am not willing to take that chance. My philosophy:

Pray for the best and prepare for the worst.

What about you?

Have you thought about what you want if and when you can no longer live independently?

Does your family know what you want if and when you can no longer make that decision for yourself?

NOTE: When I set out to write about widowhood, I did not contemplate writing about aging. But the fact is that most of the very old are women. Most of us outlive our husbands. Most younger widows want to marry again someday, but the reality for those who are older is that there aren’t enough men. The single men our age are marrying women 10-20 years younger. Most of us are not interested in being nurse or purse to a man 10-20 years older. That leaves us responsible for our future. Last week I asked the question, Do You Want to Reach 100? For the next couple of weeks, I will continue to explore the impact of aging on widows and the impact of widowhood on aging.